mkrs20181231

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____.

Commission file number: 000-14801

MIKROS SYSTEMS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		14-1598200
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)


707 Alexander Road, Suite 208, Princeton, New Jersey		08540
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, including area code: 609-987-1513

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

None

Securities Registered Pursuant to Section 12(g) of the Exchange Act:

Common Stock, $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer”, “accelerated filer", “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	[ ]	Accelerated filer [ ]
Non-accelerated filer	[ ]	Smaller reporting company [X]
		Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, based on the last sales price of the issuer’s common stock as reported by the OTCQB was $12,219,849. Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not a conclusive determination for other purposes.

As of March 28, 2019, 35,568,775 shares of the registrant's common stock were outstanding.

This document contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, but are not limited to: changes in business conditions, a decline or redirection of the U.S. defense budget, the termination of any contracts with the U.S. Government, changes in our sales strategy and product development plans, changes in the marketplace, continued services of our executive management team, our limited marketing experience, competition between us and other companies seeking Small Business Innovation Research grants, competitive pricing pressures, market acceptance of our products under development, delays in the development of products, our ability to adequately integrate our software offerings into our business model, our ability to market our solutions to commercial customers, and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. These uncertainties are described in more detail in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we do not undertake to update our forward-looking statements.

Mikros Systems Corporation (the “Company”, “we”, “Mikros” or “us”) designs and manufactures software, hardware and electronic systems used to maintain complex distributed systems. Examples of such systems include defense equipment such as radars and combat systems, and commercial and industrial applications such as printing presses, power distribution, and utility systems, and Federal Aviation Administration (“FAA”) systems.

Over the past decade, our principal customer has been the U.S. Department of Defense (“DoD”), primarily the U.S. Navy (“Navy”). We provide the following two key systems to the Navy for maintenance of radars and combat systems:

More recently, we have developed and marketed software products to analyze maintenance data collected from target systems, optimize maintenance procedures, and predict failures. Our Prognostics Framework® (PF) and Diagnostic Profiler® (DP) products provide software capabilities which complement our maintenance hardware products (ADEPT and ADSSS) and allow us to provide complete hardware/software solutions for advanced maintenance, particularly of complex distributed systems. Now that we have a complete hardware/software solution for advanced maintenance, we are expanding into commercial and industrial markets.

Adaptive Diagnostic Electronic Portable Testset. ADEPT, also known as the AN/PSM-132, is an automated maintenance workstation designed to significantly reduce the time required to align all variants of the AN/SPY1 Radar System aboard U.S. Navy AEGIS cruisers and destroyers while optimizing system performance and readiness. ADEPT systems are currently deploying on all AEGIS CG and DDG platforms to support the AN/SPY1 radar system. Since the system uses commercial instrument case and modules, ADEPT units can be modified to support both preventative maintenance and condition-based maintenance of other radars and complex electronic systems in military or commercial applications such as the AN/SPQ-9B. ADEPT represents an innovative approach to Navy shipboard maintenance, integrating modular instrumentation cards in a rugged enclosure with an onboard computer, input and output devices, networking hardware, removable hard drives, and a touch-screen display. A custom software application provides the user interface and integrates the hardware with a database that stores user information, instrument readings, maintenance requirements, and training aids. ADEPT is designed to be adapted to other complex shipboard systems, and provide integrated distance support capabilities for remote diagnostics and troubleshooting by shore-based Navy experts.

As of December 31, 2018, we have delivered a total of 226 ADEPT units to our Navy customers.

A further goal for ADEPT has been to expand the capabilities to other radar systems. In January 2014, we were awarded a $0.5 million service contract by the U.S. Navy to extend ADEPT to a second U.S. Navy radar system, the AN/SPS-49. These services are expected to assist in optimizing performance for the Ballistic Missile Defense Mission.

ADEPT Distance Support Sensor Suite. In 2013, we started development of ADSSS for the Navy’s LCS. Our system has now matured and has earned Nomenclature AN/SYM-3 from the Navy. The LCS is the U.S. Navy’s latest combat warship. ADSSS is a network-enabled system that can be configured to monitor multiple shipboard systems and report maintenance data onshore for further analysis to detect trends and predict failures. AN/SYM-3 provides an open architecture approach with industry-standard hardware, and cybersecurity compliant software to acquire and process system operational and maintenance data. The AN/SYM-3 system fully automates the capture of system operation, environment and maintenance data to provide unattended operation. The system monitors key parameters and sends alert notifications when parameters move out of tolerance.

The first full AN/SYM-3 system was successfully completed on LCS 2 and shore installation of Prognostics has been completed at Port Hueneme Division. We expect that ADSSS will be on both variants of the LCS, currently planned to be at least 32 ships. In 2019, we will be installing on four more LCS ships that are moving to deployment and this will allow for data collection while operational at sea. Another delivery order is currently being developed to allow for more installations and development. AN/SYM-3, with its remote monitoring and prognostics capabilities, has also generated interest in other systems within LCS and in other ship classes, including AEGIS and NATO SS, and we are currently pursuing several related opportunities.

Diagnostic Profiler. The Diagnostic Profiler is an integrated development environment for developing diagnostic capabilities used in maintenance, embedded diagnostics, and troubleshooting applications. The software provides diagnostic services to its host application, including fault call-outs, suggested “next best” test to further isolate faults, and direct maintenance actions. When additional faults are identified, the software prioritizes the fault callouts by probability. The use of the diagnostic profiler eliminates the need for the development and maintenance of diagnostic flow charts and hard-coded text sequences. This reduces the effort required to correct bugs and design changes. Over the life of the system, this could result in significant cost savings. This system is used by clients and has also generated yearly support contracts for service. We are under contract with Northrup Grumman to provide more capabilities to this system and onsite support.

Prognostics Framework. Prognostics Framework is an analytic software framework for implementing real-time prognostics, diagnostics, and status monitoring to support embedded prognostic applications, health management systems and condition-based maintenance applications. The Prognostics Framework software institutes an information framework that organizes relevant data related to: (i) the condition of the system; (ii) the system’s ability to perform required functions over specific time intervals; and (iii) the need for maintenance actions and repair parts. The Prognostics Framework has been used to implement a complete health management system on one of the first radar systems to require prognostics as a key element of its overall solutions. Other potential applications include complex computer networks, power generators, power supply, cooling, C4I (Command, Control, Communications, Computers & Intelligence), environmental and imaging systems.

In April 2016, we received three contracts to continue logistics support of the ADEPT maintenance automation workstation. A contract valued at approximately $0.3 million to provide ADEPT General Engineering and Support was awarded, along with two other logistics contracts to perform necessary updates, repair and calibration on the ADEPT units, totaling $0.25 million. Along with the contracts received for our ADEPT product, we received a follow on contract in the amount of $0.1 million, for technical support on the USS Fort Worth (LCS3) using the latest version of our ADSSS.

In September 2016, we were awarded and entered into a multi-year IDIQ contract with the Naval Surface Warfare Center, Port Hueneme Division, relating to our ADSSS product. The contract has a term of five years and provides for the purchase and sale of up to $48 million of ADSSS units and related engineering and logistics support. The IDIQ contract covers the first eight ships of the 28 ship program. Since the award, we have received multiple delivery awards, some of which are described below.

In February 2017, we were awarded a follow-on multi-year Small Business Innovation Research (SBIR) Phase III IDIQ contract with the Naval Surface Warfare Center, Crane Division, for our ADEPT program. The contract provides for the purchase and sale of up to $35.1 million of ADEPT units and related engineering, such as calibration, repair, training and other logistics services. Since the award, we have received multiple delivery orders, some of which are described below.

In March and April 2017, we were awarded the second, third and fourth delivery orders under the ADEPT IDIQ Contract. The second delivery order covers engineering services in the amount of $11.5 million which will be funded incrementally and facilitate the engineering and technical support for the ADEPT program during the next three years. The third delivery order contract for $0.6 million is to provide sustainment services, such as calibration, repair, evaluations, and screenings of ADEPT units to be performed in our Manufacturing and Depot Center (‘M&D Center”) in Largo, Florida. The fourth delivery order for $0.1 million is to provide training to sailors in the fleet to operate the ADEPT maintenance automation workstation.

In April 2017, we received contract awards totaling $2.0 million from the U.S. Navy to extend the capabilities of the ADSSS Condition-Based Maintenance (CBM) system to support a fourth Navy radar system, the MK 99. The SBIR office in Dahlgren, VA provided $0.5 million of the total funding to support this effort.

In July 2017 and November 2017, we received modifications which added funding to our ADEPT IDIQ Contract, for engineering services in the amounts of $0.4 million and $0.1 million, respectively. These awards will allow us to continue to support the ADEPT product line in the fleet, implement necessary software enhancements, and provide general support of the program.

In August 2017, we received a modification to our ADEPT sustainment delivery order, adding $0.5 million to allow our M&D Center in Largo, Florida to continue to provide bi-annual sustainment services for units from the fleet cycling through our M&D Center.

In September 2017, we received a delivery order in the amount of $2.4 million for the production and delivery of additional ADEPT units. These new units will continue our fleet support on Aegis cruisers and destroyers in the U.S. Navy. In 2018, we received additional modifications to our ADEPT IDIQ Contract and incremental awards for continued engineering services in the aggregate amount of $0.42 million. This funding will support necessary software enhancements to sustainment services for the ADEPT product out of our M&D Center.

In February and March 2018, we received modifications to our ADEPT sustainment delivery orders, adding $0.25 million to allow us to continue to provide bi-annual sustainment services for units from the fleet cycling through the M&D Center. In addition to those sustainment services, it allows our team at the M&D Center to provide training to sailors in the fleet to operate the ADEPT maintenance automation workstation.

Between January 2018 and April 2018, we received multiple contract awards which increased funding on our ADEPT IDIQ Contract for Engineering Services. The total amount awarded in the first quarter of 2018 was $0.5 million and an additional $1.6 million was awarded in April 2018. This funding will allow us to continue supporting the ADEPT product line in the fleet and implementing necessary software enhancements to increase readiness.

In June 2018, we received the second delivery order on our current multi-year IDIQ contract with the Naval Surface Warfare Center, Port Hueneme Division, relating to our ADSSS product. The award totaling $2.5 million will support the MK 99 FCS development, test and installation.

In August 2018, we received a contract modification to add funding to our ADEPT IDIQ Contract for engineering services in the amount of $1.3 million. This additional funding will support the ADEPT product line in the fleet, implement necessary software enhancements and provide general support.

In September 2018, we received modifications to our ADEPT sustainment delivery orders, adding $0.25 million. This funding allows the M&D Center in Largo, Florida to provide bi-annual sustainment services for units from the fleet.

In November 2018, we received a contract modification to add funding to our ADEPT IDIQ Contract for engineering services in the amount of $0.2 million. This additional funding will support the ADEPT product line in the fleet, implement necessary software enhancements and provide general support.

We operate a Manufacturing and Depot Center in Largo, Florida which has been manufacturing our AN/PSM-132 and AN/SYM-3 systems for our DoD customers since 2010. Our center is American National Standards Institute (ANSI) ISO 9001:2015 certified for manufacturing, distribution and support of electronic systems for military and commercial applications and products. The facility is supported by our Research and Development center in Fort Washington, PA which is ISO 9001:2015 certified for design and development of electronic systems for military and commercial applications and products. Our quality management system complies with Naval Sea Systems Command Standard Item 009-04. In addition to facility certifications, we have personnel trained and certified in numerous IPC – Association Connecting Electronics Industries, Lean Six Sigma (LSS), and Manufacturing Skill Standards Council (MSSC) specialties. We offer light manufacturing, integration, kitting, build-to-print, and box-build with testing services to commercial customers and DoD contractors. In September 2017, we received our first commercial full-rate order for integration services in which we delivered 2,650 units. Expanding the Largo facility’s light manufacturing and integration services for commercial customers and other DoD contractors is a key component of our long-term growth strategy.

Our strategy for continued growth is based on continuing expansion of our defense business and executing new initiatives to apply our advanced maintenance technology in commercial markets. With regard to the defense industry, we expect to continue expanding our technology base, backlog and revenue by continuing our active participation in the DoD SBIR program and bidding on projects that fall within our areas of expertise. These areas include electronic systems engineering and integration, radar systems engineering, combat/C4I (Command, Control, Communications, Computers & Intelligence) systems engineering, and communications engineering. We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products, such as ADEPT and ADSSS, with broad appeal in both the government and commercial marketplace. Our state-of-the-art test equipment can be used by many commercial and governmental customers such as the FAA, radio and television stations, cell phone stations, and airlines. Second, we will continue to pursue SBIR projects with the Department of Homeland Security, the U.S. Navy, and other government agencies. Third, we believe that through our marketing of products, such as ADEPT, we will develop key relationships with prime defense contractors. Our strategy is to develop these relationships into long-term, key subcontractor roles on future major defense programs awarded to these prime contractors.

With regard to commercial markets, our Diagnostics Profiler and Prognostics Framework software offerings complement our hardware products and allow us to provide complete hardware/software solutions for advanced maintenance applications. Current customers for these systems include major multinational corporations such as HP, which recently extended our Diagnostic Profiler software support for a sixth year. We continue to receive repeat orders from these customers to support their applications. We plan to provide “condition-based maintenance” systems for “complex distributed systems” to commercial customers. In that regard, we are currently developing a condition-based maintenance solution for industrial equipment based on our proprietary Prognostics Framework solution. We have deployed two active pilot systems that are providing key maintenance data on a daily basis to service technicians. We are also in discussion with additional commercial companies regarding the use of our condition based maintenance applications.

In 2019, our primary strategic focus is to continue as a premium provider of R&D and product development services to the defense industry, generate multiple task orders under our two IDIQ contracts and, expand our commercial business through marketing and sales of our Prognostics Framework and Diagnostic Profiler software products. In furtherance of this strategy, we have made material investments in our engineering and technical staffs to provide broader and deeper expertise to our customers. We will also seek to generate incremental revenue through providing light assembly and production services to commercial customers at our M&D Center in Largo, Florida.

Over the longer term, we intend to further develop advanced maintenance technologies and implement these technologies in products for deployment in defense applications and to expand into more commercial applications. We believe that many of our core capabilities, remote monitoring, rugged systems, predictive maintenance and communications expertise, are applicable to other industries that work with complex distributed systems, such as utilities, communications and transportation systems. We are currently in discussions with certain industry participants regarding this initiative.

During recent years, the combination of spending caps, discretionary spending cuts, sequestration and reductions in defense spending has caused, and may in the future continue to cause, delays in funding certain projects. This may negatively impact our revenues and profits.

The SBIR arena is highly competitive and we compete against numerous small businesses for SBIR awards. In our general business area of electronic defense systems and products, we also compete against many larger companies that have greater financial and human resources. We believe that the primary competitive factors in obtaining SBIR contracts are technical expertise, prior relevant experience, and cost. We believe that our history of completing projects in a timely and efficient manner, along with the experience of our management and technical personnel, enables us to compete effectively for SBIR grants.

Under SBIR data rights, we are protected from unauthorized use of SBIR-developed technology and data for a period of five years after acceptance of all items to be delivered under a particular SBIR contract or any follow-on contract.

Substantially all of our revenue is derived from SBIR and IDIQ contracts with the U.S. Federal government. In 2018, approximately 98% of our revenues were realized in connection with government contracts. In 2017, approximately 99% of our revenues were realized in connection with task orders under the IDIQ contract for ADEPT units and development of the ADSSS system. Although our operations are not subject to any particular government approval or regulations, we are dependent upon funding being made available to the DoD in amounts sufficient to cover the SBIR grants and other DoD contracts for which we compete.

We specialize in the development of electronic systems technology for military and commercial applications. All of our research and development costs in 2018 and 2017 were for the benefit of our customers, who are agencies of the federal government. The customer- sponsored research and development projects are performed under contracts and are accounted for as contract costs as the work is performed. In future periods, we may engage in company-sponsored research and development projects which would be expensed as incurred.

In 2018, we accelerated our commitment to expanding our technical expertise and strengthening our research and development capabilities. These efforts included hiring eight additional employees, implementing policies and procedures required to earn and maintain important certifications, including ISO 9001:2015 quality certifications and Naval Sea Systems Quality Standard 009-004. We believe these investments will make us more competitive and generate new opportunities for us in both government and commercial markets.

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. Our backlog consists of (i) ADEPT units to be developed and delivered to the federal government together with continued development and testing and (ii) ADSSS systems to be developed and derived together with related engineering and logistics support. At December 31, 2018, our backlog was $4.8 million.

As of December 31, 2018, we had 35 full-time employees of which 27 work at our Fort Washington, Pennsylvania, Research & Development Center, one works at our Princeton, New Jersey corporate headquarters, one works at our Washington, DC office, and six work at our Largo, Florida M&D Center. None of our employees belong to a labor union. We believe relations with our employees are good. We also use the services of subcontractors and consultants as necessary to aid in software and hardware development and for the manufacture of products.

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors in addition to other information in this Annual Report on Form 10-K before purchasing our common stock. The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our company and our industry. In addition to these risks, our business may be subject to risks currently unknown to us. If any of these or other risks actually occurs, our business may be adversely affected, the trading price of our common stock may decline and you may lose all or part of your investment.

A decline in or a redirection of the U.S. defense budget could result in a material decrease in our sales, earnings and cash flows.

Because we derive nearly all of our revenue from contracts with the federal government, the success and development of our business will continue to depend on our successful participation in federal government contract programs. Changes in federal government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs that we support or a change in federal government contracting policies could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise options to renew contracts.

Our government contracts are primarily dependent upon the U.S. defense budget. DoD budgets which may continue to be negatively affected by several factors, including events we cannot foresee, U.S. Government budget deficits, current or future economic conditions, new administration priorities, U.S. national security strategies, a change in spending priorities, the cost of sustaining U.S. military and related security operations around the world where U.S. military support may be pivotal, and other related exigencies and contingencies. While we are unable to predict the impact and outcome of these uncertainties, the effect of changes in these DoD imperatives have and could continue to cause the DoD budget to decrease.

In August 2011, Congress enacted the Budget Control Act of 2011 (“BCA”) which imposed spending caps and discretionary spending cuts, including a reduction of defense spending, between the 2012 and 2021 U.S. Government fiscal years. The BCA also triggered an automatic sequestration process, which imposed additional budget cuts to National security accounts. The Bipartisan Budget Act of 2018 (the “BBA 2018”) provided sequestration relief for fiscal years 2018 and 2019, however, sequestration remains in effect, for fiscal years 2020 and 2021. The BBA provides for FY 2018 defense budget of $700 billion, which includes $629 billion in the base budget in compliance with the modified BCA spending caps and $71 billion for overseas contingency operations, representing an increase of more than 10% over FY 2017 spending levels. The FY 2019 defense budget totals $716 billion.

U.S. Government defense spending levels are difficult to predict beyond the near-term due to numerous factors, including the external threat environment, future governmental priorities and the state of governmental finances. Changes in U.S. Government defense spending or changes in U.S. Government priorities, policies, requirements and budgets may reduce funding for some of our programs and generally will have a negative impact on our sales, results of operations, and cash flows.

We depend on U.S. Government contract awards that are only partially funded and which depend upon annual budget appropriations. A delay in the completion of the U.S. Government’s budget process or the impact of sequestration (automatic spending cuts), could delay procurement of the services and solutions we provide and have an adverse effect on our future revenue.

Budget decisions made by the U.S. Government are outside of our control and could have significant consequences for our business. Funding for U.S. Government contract awards is subject to Congressional appropriations. Although multi-year awards may be planned or authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may be expected to continue for several years. Consequently, awards often initially receive only partial funding, and additional funds are committed only as Congress makes further appropriations. The termination of funding for any of our U.S. Government prime contracts or subcontracts could result in a loss of anticipated future revenue attributable to that program and a reduction in our cash flows and could have an adverse impact on our operating results.

In years when the U.S. Government does not complete its budget process before the end of its fiscal year on September 30, government operations are typically funded pursuant to a “continuing resolution” that authorizes agencies of the U.S. Government to continue to operate, but does not authorize new spending initiatives. When the U.S. Government operates under a continuing resolution, delays can occur in the procurement of the services and solutions that we provide. When supplemental budgets are required to operate the U.S. Government and passage of legislation needed to approve any supplemental budget is delayed, the overall funding environment for our business could be adversely affected.

Our government contracts contain unfavorable termination provisions and are subject to audit and modification.

If a termination right is exercised by the government, it could have a material adverse effect on our business, financial condition and results of operations. Companies engaged primarily in supplying defense related equipment and services to U.S. Government agencies are subject to certain business risks particular to the defense industry. These risks include the ability of the U.S. Government to unilaterally:

All of our U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if we default by failing to perform under the terms of the contract. Termination for convenience provisions provide only for our recovery of costs incurred or committed settlement expenses and profit on the work completed prior to termination. Termination for default provisions provide for us to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.

We rely predominantly on U.S. Government entities, and the loss of our contracts could have a material adverse effect on our results of operations and cash flows.

Our earnings are predominantly derived from contracts with agencies of the U.S. Government. The loss of any of these contracts could have a material adverse effect on our results of operations and cash flows.

Our revenue, gross margin, operating income and net income may vary from quarter to quarter due to a number of factors. Many factors, some of which are not within our control, may contribute to fluctuations in operating results. These factors include the following:

Any failure by us to continue to generate task orders or fulfill our obligations under our current IDIQ contracts would have a material adverse effect on our financial condition and results of operation.

In the third quarter of 2016 and first quarter of 2017, we were awarded two IDIQ contracts. The first is for production, delivery, logistics and engineering support for our ADSSS system. This contract has a term of five years and provides for the purchase of up to $48 million of ADSSS units and related support. The second is for the production, engineering and logistics support for our ADEPT product. This contract is for a term of five years and provides for the purchase of up to $35.1 million of ADEPT units and related support. Sales under these contracts accounted for a substantial majority of our revenues in the last two fiscal years and are expected to continue to account for the substantial majority of our revenues in future periods. As a result we are substantially dependent upon generating continued task orders under these IDIQ contracts. Any reduction in task orders or any failure by us to fulfill our contractual obligations under these IDIQ contracts would result in substantially reduced revenue and profits and would have a material adverse effect on our financial condition and results of operation.

Our success depends on the services of our senior management and our ability to hire and retain additional skilled personnel.

Our future success depends on the personal efforts and abilities of the members of our senior management team to provide strategic direction, develop business, manage operations and maintain a cohesive and stable environment. Specifically, we are dependent upon Thomas J. Meaney, Chief Executive Officer and Chief Financial Officer, Mark J. Malone, President, Walter T. Bristow, Chief Operating Officer, and David Henry Silcock, Chief Technology Officer. We do not have employment agreements with any key personnel. Furthermore, our performance also depends on our ability to attract and retain management and qualified professional and technical operating staff, which are in high demand in our industry. The loss of services of any key executive, or our inability to continue to attract and retain qualified technical staff, could have a material adverse effect on our business, results of operations and financial condition. We do not maintain any key employee insurance on any of our executives.

The demand for our products and planned products is characterized by rapid changes in technology, including the potential introduction of new types of wireless communications and digital signal processor technologies, which could have a material adverse impact on our business. Our future success will depend in part on our ability to continually enhance our current technology and to develop or acquire new ideas that address the needs of the defense industry and other potential users. There can be no assurance that we will be successful in developing new products or procedures that respond to technological changes. There can be no assurance that research and development by competitors will not render our technology obsolete or uncompetitive. In addition, in a technology based industry, there can be no assurance that a claim of patent or other infringement will not be made against us. While we are not aware of any such claims, no infringement studies have been conducted on our behalf.

High technology applications such as those being developed by us often require large investments of both money and talent. Many large entities with greater financial, technical and human resources than us are currently investing heavily in products and services that compete directly with our services and underlying products. There is no assurance that our offerings can be successfully marketed against such competition. In addition, being first in the market with new high technology is a critical factor in our success in the market. There is no assurance that we will be able to introduce new offerings to the market before any of our competitors. As the markets in which we compete are mature and new and existing companies compete for customers, price competition is likely to intensify, and such price competition could adversely affect our results of operations.

We rely on third-party contractors for certain engineering services that may be difficult to replace.

We currently provide a portion of our engineering services through third-party contractors. These services may not continue to be available on commercially reasonable terms, if at all. Services that are not immediately replaceable would need to be internally developed, which could strain existing engineering personnel and require us to spend substantial time and resources to retain additional personnel or third party contractors. The loss or inability to maintain any of these engineering service providers could result in delays in the development of our products and services until equivalent services, if available, are identified, developed, and integrated, which could harm our business.

Historically, we have developed and sold technology and products for military applications, primarily to the U.S. Navy. We are developing commercial products and applications that perform different functions than our historic products and are targeted at an entirely different customer base. Because we have not previously operated as a provider of commercial products, we have no basis to evaluate our ability to develop, market and sell such products. Our ability to commercialize any products or services and generate operating profits and positive operating cash flow will depend principally upon our ability to:

Our business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.

As a defense contractor, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information; threats to the security of our facilities and infrastructure; and threats from terrorist acts. Although we utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities, essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations, or cash flows.

Cybersecurity attacks in particular are evolving and include but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could damage our reputation and lead to financial losses from remedial actions, loss of business or potential liability.

We may issue additional shares of our capital stock that could dilute the value of your shares.

Our outstanding securities include options to purchase common stock. During the respective terms of the options, the holders thereof are given an opportunity to profit from a rise in the market price of our common stock, causing a dilution of the interests of existing stockholders. Thus, the terms on which we may obtain additional financing during that period may be adversely affected. The holders of options may exercise their respective rights to acquire our common stock at a time when we could be seeking to raise additional capital through sales of securities on terms more favorable than those being offered by us to new investors. In the event that such holders exercise their rights to acquire shares of our common stock at such time, the net tangible book value per share of our common stock will be subject to dilution.

Future sales of our securities by existing stockholders could adversely affect the market price of our common stock.

Future sales of shares by existing stockholders under Rule 144 of the Securities Act of 1933, as amended, through the exercise of outstanding options, through vesting of restricted stock awards, or otherwise could have a negative impact on the market price of our common stock. We are unable to estimate the number of shares that may be sold under Rule 144 because such sales depend on the market price for our common stock, the personal circumstances of the sellers, and a variety of other factors. Any sale of substantial amounts of our common stock in the open market may adversely affect the market price of our common stock and may adversely affect our ability to obtain future financing in the capital markets.

Our common stock is considered a “penny stock” and is subject to the penny stock rules.

Our common stock currently trades over-the-counter on the OTCQB. Since our common stock continues to trade below $5.00 per share, our common stock is considered a “penny stock” and is subject to Securities and Exchange Commission rules and regulations which impose limitations upon the manner in which our shares can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

We have never paid dividends on our common stock and we do not anticipate paying dividends in the foreseeable future.

We have never paid cash dividends on our common stock. Any payment of cash dividends in the future will depend upon our earnings (if any), financial condition and capital requirements. We do not anticipate paying dividends in the foreseeable future. Accordingly, any potential investor who anticipates the need for current dividends from its investment should not purchase any of our securities.

Our common stock is thinly traded and the price of our common stock may experience price volatility.

Our common stock is currently traded over-the-counter on the OTCQB. There can be no assurance that an active market for our shares will develop or, if developed, will be sustained. Absent a public trading market, an investor may be unable to liquidate its investment. We believe that factors such as the announcements of the availability of new services and new contracts by us or our competitors, quarterly fluctuations in our financial results and general conditions in the communications industry could cause the price of our common stock to fluctuate substantially. If stockholders seek to sell their shares in a thinly traded stock, it may be difficult to obtain the price desired. In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the specific companies.

Our directors, officers and principal stockholders, beneficially own approximately 23% of our common stock and will continue to have significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of our directors. In addition, such influence by management could have the effect of discouraging others from attempting to take control of us, thereby increasing the likelihood that the market price of our common stock will not reflect a premium for control.

We are authorized to issue 3,000,000 shares of preferred stock, which may be issued by our Board of Directors on such terms, and with such rights, preferences and designations as the board may determine. Issuance of such preferred stock, depending upon the rights, preferences and designations thereof, may have the effect of delaying, deterring or preventing a change in control of our company. In addition, certain “anti-takeover” provisions of the Delaware General Corporation Law, among other things, restrict the ability of stockholders to effect a merger or business combination or obtain control of the Company, and may be considered disadvantageous by a stockholder.

Ineffective internal controls could impact our business and operating results.

Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations.

Our principal executive offices are located in Princeton, New Jersey, where we are subject to a month to month lease.

Our engineering research, design and development facility is located in Fort Washington, Pennsylvania, where we lease approximately 6,000 square feet of general office space under a lease agreement that was renewed in March, 2017 and will continue through March 2022.

We maintain a marketing office in Washington, D.C. under a month-to-month lease.

We lease a facility in Largo, Florida, which supports production of our ADEPT product line and quality assurance, field support, and life cycle management. We entered into a one year lease agreement commencing in October, 2018.

We believe that our office, research, design, and development space is adequate to support our current and anticipated operations over the next 12 months.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is quoted on the OTCQB under the trading symbol “MKRS”. Over-the-counter market quotations represent only prices between dealers on each trading day as submitted from time to time by certain of the securities dealers wishing to trade in our common stock, do not reflect retail mark-ups, mark-downs or commissions, and may differ substantially from prices in actual transactions.

We have never paid cash dividends on our common stock. Any payment of cash dividends in the future will depend upon our earnings (if any), financial condition, and capital requirements. Certain provisions of our credit facility prohibit us from declaring or paying dividends on our common stock. The declaration and payment of dividends on our common stock is subject to the discretion of our Board of Directors and limitations imposed under applicable Delaware law. We do not anticipate paying dividends in the foreseeable future.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward looking statements that involve risks and uncertainties. All forward looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward looking statements. Our actual results may differ materially from those anticipated in these forward looking statements as a result of a number of factors, including those set forth under the caption “Risk Factors” contained in this report and elsewhere herein. The following should be read in conjunction with our annual financial statements contained elsewhere in this report.

Our primary business focus is to pursue SBIR programs from the DoD, Department of Homeland Security, and other governmental authorities, and to expand this government funded research and development into products and services. Since 2002, we have been awarded several Phase I, II, and III SBIR contracts, and several IDIQ contracts for our ADEPT and ADSSS products.

Revenues from our government contracts represented substantially all of our revenues for the years ended December 31, 2018 and 2017. We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products for both the government and commercial marketplace.

Adaptive Diagnostic Electronic Portable Testset. ADEPT, also known as the AN/PSM-132, is an automated maintenance workstation designed to significantly reduce the time required to align all variants of the AN/SPY-1 Radar System aboard U.S. Navy Aegis cruisers and destroyers, while optimizing system performance and readiness. ADEPT Systems are currently deploying on all Aegis CG and DDG platforms to support the AN/SPY1 radar system. Since the system uses commercial instrument case and modules, ADEPT units can be modified to support both preventative maintenance and condition-based maintenance of other radars and complex electronic systems in military or commercial applications. In that regard, we have a service contract with the U.S. Navy to extend ADEPT to a second U.S. Navy radar system, the AN/SPS-49. These services are expected to assist in optimizing performance for the Ballistic Missile Defense Mission. As of the date of this report, we have delivered a total of 226 ADEPT units.

ADEPT Distance Support Sensor Suite. In 2013, we started development of ADSSS for the Navy’s LCS. Our system has now matured and has earned Nomenclature AN/SYM-3 from the Navy. ADSSS is a network-enabled system that can be configured to monitor multiple shipboard systems and report maintenance data onshore for further analysis to detect trends and predict failures. ADSSS provides an open architecture approach with industry standard hardware, and cybersecurity compliant software to acquire and process system operational and maintenance data. ADSSS fully automates the capture of system operation, environment and maintenance data to provide unattended operation. The system monitors key parameters and sends alert notifications when parameters move out of tolerance. We expect ADSSS to be used on both variants of the LCS, currently planned to be at least 32 ships. ADSSS, with its remote monitoring and prognostics capabilities, has also generated interest in other ship classes, including Aegis, and we are currently pursuing several related opportunities.

Diagnostic Profiler. The Diagnostic Profiler is an integrated development environment for developing diagnostic capabilities used in maintenance, embedded diagnostics and troubleshooting applications. The software provides diagnostic services to its host application, including fault call-outs, suggested “next best” test to further isolate faults, and direct maintenance actions. When additional faults are identified, the software prioritizes the fault call-outs by probability. The use of the diagnostic profiler eliminates the need for the development and maintenance of diagnostic flow charts and hard-coded text sequences. This reduces the effort required to correct bugs and implement design changes. Over the life of the system, this could result in significant cost savings.

Prognostics Framework. Prognostics Framework is an analysis software framework that implements real-time prognostics, diagnostics and status monitoring to support embedded prognostic applications, health management systems and condition-based maintenance applications. The Prognostics Framework software institutes an information framework that organizes relevant data related to: (i) the condition of the system; (ii) the system’s ability to perform required functions over specific time intervals; and (iii) the need for maintenance actions and repair parts. The Prognostics Framework has been used to implement a complete health management system on one of the first radar systems to require prognostics as a key element of its overall solutions. Other potential applications include complex computer networks, power generators, power supply, cooling and environmental systems.

Please see ITEM 1. BUSINESS above for a description of our Government Contracts.

As substantially all of our revenue is derived from contracts with the U.S. Federal government, our key performance indicator is the dollar volume of contracts and task orders awarded to us under our IDIQ contracts. Increases in the number and value of contracts and trade orders awarded will generally result in increased revenues in future periods and, assuming relatively stable variable costs associated with our fulfilling such awards, increased profits in future periods. The timing of such awards is uncertain as we sell to Federal government agencies where the process of obtaining such awards can be lengthy and at times uncertain. As the substantial majority of our revenue in 2018, and expected revenue in 2019, is or will be from sales of ADEPT units and ADSSS systems under our IDIQ contracts, continued generation of task orders and our ability to expand the market and potential customer base for ADEPT units will be a key indicator of future revenue. ADEPT units must be serviced and calibrated every two years. Accordingly, as we continue to increase the installed base of ADEPT units and expand the units to other radar systems, we expect to generate future recurring maintenance and service revenue.

Our strategy for continued growth is based on continuing expansion of our defense business and executing new initiatives to apply our advanced maintenance technology in commercial markets. With regard to the defense industry, we expect to continue expanding our technology base, backlog and revenue by continuing our active participation in the DoD SBIR program and bidding on projects that fall within our areas of expertise. These areas include electronic systems engineering and integration, radar systems engineering, combat/C4I (Command, Control, Communications, Computers & Intelligence) systems engineering, and communications engineering. We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products, such as ADEPT and ADSSS, with broad appeal in both the government and commercial marketplace. Our state of the art test equipment can be used by many commercial and governmental customers such as the FAA, radio and television stations, cell phone stations, and airlines. Second, we will continue to pursue SBIR projects with the Department of Homeland Security, the U.S. Navy, and other government agencies. Third, we believe that through our marketing of products, such as ADEPT, we will develop key relationships with prime defense contractors. Our strategy is to develop these relationships into long-term, key subcontractor roles on future major defense programs awarded to these prime contractors.

With regard to commercial markets, our Diagnostics Profiler and Prognostics Framework software offerings complement our hardware products and allow us to provide complete hardware/software solutions for advanced maintenance applications. Current customers for these systems include major multinational corporations such as HP, which recently extended our Diagnostic Profiler software support for a sixth year. We continue to receive repeat orders from these customers to support their applications. We plan to provide “condition-based maintenance” systems for “complex distributed systems” to commercial customers. In that regard, we are currently developing a condition-based maintenance solution for heating ventilation, air conditioning and refrigeration (HVAC) equipment based on our proprietary Prognostics Framework solution. We have deployed two active pilot systems that are providing key maintenance data on a daily basis to service technicians. We are also in discussions with additional commercial companies regarding the use of our condition based maintenance applications.

In 2019, our primary strategic focus is to continue as a premium provider of R&D and product development services to the defense industry, generate multiple task orders under our two IDIQ contracts, and expand our commercial business through marketing and sales of our Prognostics Framework and Diagnostic Profiler software products. In furtherance of this strategy, we have made material investments in our engineering and technical staffs to provide broader and deeper expertise to our customers. We will also seek to generate incremental revenue through providing light assembly and production services to commercial customers at our M&D Center in Largo, Florida.

During recent years, the combination of spending caps, discretionary spending cuts, sequestration and further changes in defense spending and priorities have caused, and may in the future continue to cause, delays in funding certain projects. This may negatively impact our revenues and profits.

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, warranty costs, recoverability of long-lived assets, income taxes, backlog and commitments. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.

Revenue Recognition We provide our products and services under fixed-price and cost-reimbursable contracts. Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract. We also enter into cost-plus-fixed-fee contracts. The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does not vary with actual costs. We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.

We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as one performance obligation. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period. We classify net sales as products or services on our statements of income based on the predominant attributes of the performance obligations.

We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. Our contracts do not include variable consideration. At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts or delivery orders are distinct and will be accounted for as a separate contract.

We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of our revenue is recognized over a period of time as we perform under the contract because control of the work in process transfers continuously to the customer. This continuous transfer of control of the work in process to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit, and take control of any work in process.

For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation. For performance obligations to provide services to the customer, revenue is recognized over a period of time based on costs incurred as our customer receives and consumes the benefits.

Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. The estimated consideration is determined at the outset of the contract and considers the risks related to the technical, schedule and cost impacts to complete the contract. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of December 31, 2018, our ending backlog was $4.8 million. For arrangements with the DoD, we generally do not begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type.

Accounts Receivable Accounts receivable from government contracts are stated at outstanding balances. When necessary, an allowance for doubtful accounts is established through provisions charged against operations. Receivables deemed to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

Management’s periodic evaluation of the adequacy of the allowance is based on past experience, aging of the receivables, adverse situations that may affect a customer's ability to pay, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires estimates that may be susceptible to significant change. Unpaid balances remaining after the stated payment terms are considered past due. Substantially all of our business is conducted with the federal government in which nonpayment for awarded contracts is unlikely. No allowance for doubtful accounts was deemed necessary by management at December 31, 2018 and 2017.

Warranty Expense We provide a limited warranty, as defined by the related warranty agreements, for our production units. Our warranties require us to repair or replace defective products during the 12 month period following delivery and acceptance of production units by the government. We estimated the costs that may be incurred under our warranty and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of units sold, anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of recorded warranty liability and adjusted the amount as necessary. During the years ended December 31, 2018 and 2017, we recognized a warranty expense (benefit) of $142,000 and $(198,967), respectively. Since the inception of the ADEPT IDIQ contract in March 2010, we have delivered 226 ADEPT units. As of December 31, 2018, 37 ADEPT units remain under the limited warranty coverage. We had an accrued warranty expense liability of $153,723 and $40,000 at December 31, 2018 and 2017, respectively.

Income Taxes Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We had $112,814 of state net operating loss carry forwards at December 31, 2018 which begin to expire in 2023.

We recognize liabilities for uncertain tax positions. If we ultimately determine that the payment of such a liability is not necessary, then we reverse the liability and recognize a tax benefit during the period in which the determination is made that the liability is no longer necessary. As of December 31, 2018 and 2017, there were no tax contingencies or unrecognized tax positions recorded.

On December 22, 2017, the “Tax Cuts and Jobs Act” (the “2017 Tax Act”), which enacted a broad range of changes to the United States Tax Code, was signed into law. The 2017 Tax Act, among other things, included changes to U.S. federal tax rates, imposed significant additional limitations on the deductibility of interest and net operating losses and allowed for the expensing of certain capital expenditures. The Company’s net deferred tax assets and liabilities were revalued at the newly enacted U.S. corporate rate, and the impact, which was not significant, was recognized in tax expense for the year ended December 31, 2017, the year of enactment.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize on the balance sheet assets and liabilities arising from operating leases. The ASU also requires disclosure of key information about leasing arrangements. ASU 2016-02 is effective on January 1, 2019, using the modified retrospective method of adoption, with early adoption permitted. The Company is currently finalizing its evaluation of the effect adopting ASU 2016-02 will have on its financial statements and disclosures. The adoption of this ASU will result in the recognition of a right-of-use asset and lease liability on the balance sheet and expanded financial statement disclosures in amounts that are not material to the financial statements.

We generated revenues of $8,561,346 in the year ended December 31, 2018 compared to $7,196,131 in 2017, an increase of $1,365,215, or 19%. The increase was due primarily to a production order for 26 ADEPT units in September 2017, increase in revenue from engineering contracts, and the receipt of additional contracts for engineering services, support and repairs, and calibration services.

Cost of sales consists of direct contract costs including labor, material, subcontracts, warranty expense for ADEPT units that have been delivered, travel, and other direct costs. Costs of sales were $3,602,555 in 2018 compared to $2,994,087 in 2017, an increase of $608,468, or 20%. The increase was due primarily to the receipt of a production order for 26 ADEPT units in September 2017, increase in revenues from engineering contracts received in 2017, and the receipt of additional contracts for engineering services, support and repairs, and calibration services. As a percentage of revenue, cost of sales was 42% in both 2018 and 2017.

The majority of our engineering costs consist of (i) salary, wages and related fringe benefits paid to engineering employees, (ii) rent-related costs, and (iii) consulting fees paid to engineering consultants. As the nature of these costs benefit the entire organization and all research and development efforts, and their benefit cannot be identified with a specific project or contract, these engineering costs are classified as part of “engineering overhead” and included in operating expenses. Engineering costs were $ 2,712,810 in 2018 as compared to $2,180,003 in 2017, an increase of $532,807, or 24%. The increase in 2018 was due to increases in engineering salaries and fringe benefits for additional employees hired in 2017, incentive compensation, and engineering consulting fees.

General and administrative expenses consist primarily of salary, intellectual property, consulting fees and related costs, professional fees, business insurance, franchise tax, SEC compliance costs, travel, and unallowable expenses (consisting of those expenses for which the government will not reimburse us). General and administrative expenses were $1,752,768 in 2018 as compared to $1,565,240 in 2017, an increase of $187,528, or 12%. The increase was due primarily to increases in salaries, incentive compensation, research and development costs, and professional fees.

The income tax expense was $166,734 in 2018 and $223,830 in 2017, representing an effective income tax rate of 34% and 49%, respectively. At December 31, 2018, the difference from the expected federal income tax rate is attributable to state income taxes and certain permanent book-tax differences.

We reported a net income of $329,210 in 2018 as compared to $235,805 in 2017. The increase was attributable primarily to the increase in revenues during 2018 with proportional increases in our selling, general and administrative expenses and engineering expenses.

Since our inception, we have financed our operations through debt, private and public offerings of equity securities and cash generated by operations.

At December 31, 2018, we had cash and cash equivalents of $2,206,749 and net working capital of $1,974,624. During the year ended December 31, 2018, net cash provided by operating activities was $1,286,701 compared to $432,377 in 2017. The increase in operating cash flows was due primarily to the timing of our billings and collections, an increase in net income and increases in liabilities as a result of timing of payments to vendors and employees.

Net cash used in investing activities was $253,479 for the year ended December 31, 2018 as compared to $130,418 for the year ended December 31, 2017, an increase of $123,061. The increase was due to the planned implementation of a new application software to support operations and an increase in purchases of equipment, furniture and fixtures related to an expansion of our offices in Pennsylvania.

During 2018, cash provided by financing activities was $350 as compared to $12,350 in 2017. The cash provided by financing activities for both periods relates to the exercise of employee stock options.

On January 31, 2018, we entered into a $550,000 credit facility with PNC Bank. The facility initially matured on January 31, 2019 and has been extended to January 31, 2020 and accrues interest at a variable rate equal to the Daily LIBOR Rate plus 250 basis points. Interest is paid monthly. Principal borrowings may be prepaid at any time without penalty and the facility is secured by substantially all of our assets. The facility contains customary affirmative and negative nonfinancial covenants. As of the date of this report, no amounts were outstanding under the facility.

In order to pursue strategic opportunities, obtain additional SBIR contracts, or acquire strategic assets or businesses, we may need to obtain additional financing or seek strategic alliances or other partnership agreements with other entities. In order to raise any such financing, we anticipate considering the sale of additional debt or equity securities under appropriate market conditions. There can be no assurance, assuming we successfully raise additional funds or enter into business alliances, that we will remain profitable or continue to generate positive cash flow.

We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months.

As of December 31, 2018, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

The financial statements required to be filed pursuant to this Item 8 are appended to this report located immediately after the signature page.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”), was carried out by us under the supervision and with the participation of our president, who serves as our Principal Executive Officer and Principal Financial Officer. Based upon that evaluation, our president concluded that as of December 31, 2018, our disclosure controls and procedures were effective to ensure (i) that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to management, including our president, in order to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting and the preparation of financial statements for external purposes, in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including our president, conducted an evaluation of the effectiveness of internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on its assessment, management has concluded that, as of December 31, 2018, the Company’s internal control over financial reporting was effective based on those criteria.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. The management report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits us to provide only management’s report in this annual report.

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The current members of our Board of Directors and executive officers of our Company are as follows:

We believe that our Board should be composed of individuals with sophistication and experience in many substantive areas that impact our business. We believe that experience, qualifications, or skills in the following areas are most important: regulatory and government affairs; accounting and finance; design, innovation and engineering; strategic planning; human resources and development practices; and board practices of other corporations. These areas are in addition to the personal qualifications described in this section. We believe that all of our current Board members possess the professional and personal qualifications necessary for board service, and have highlighted particularly noteworthy attributes for each Board member in the individual biographies below. In addition, length of service on our Board has provided several directors with significant exposure to both our business and our industry in which we compete. The principal occupation and business experience, for at least the past five years, of each current director is as follows:

Paul G. Casner, Jr. has been a director since May 2002 and was elected Chairman of the Board in October 2009. Since 2008, he has served as a director and as the Chief Executive Officer of Atair Aerospace, Inc., an aerospace defense contractor located in Brooklyn, New York. From 2005 to July 2011, Mr. Casner was the CEO and President of Integral Systems, Inc., a defense contractor based in Columbia, Maryland. Mr. Casner recently served as the COO of The Boston Holding Group, a financial management and investment organization. Mr. Casner has over forty years of defense industry experience, holding several senior positions in business management, technical management, strategic planning and business development including serving as the President of the Electronic Systems Group of DRS Technologies. He is a member of the Naval Reserve Association and is a Commodore of the Navy League of the United States, in addition to other professional affiliations. As a result of these and other professional experiences, Mr. Casner possesses particular knowledge and experience in business development, technology development, and the defense industry that strengthen the Board’s collective qualifications, skills, and experience.

Thomas C. Lynch has been a Director since February of 1997. Admiral Lynch retired from the U.S. Navy after a decorated 31-year career. A graduate of the U.S. Naval Academy, his Naval assignments included Chief, Navy Legislative Affairs; Commander of the Eisenhower Battle Group during Operation Desert Shield; Superintendent of the U.S. Naval Academy from 1991 to 1994; and Director of the Navy Staff at the Pentagon from 1994 to 1995. He was also the captain of the 1963 Navy Cotton Bowl team with teammate Roger Staubach, its Heisman winning Quarterback. In 2010, he was awarded the USNA Distinguished Graduate Award. After retiring from the Navy, from 1995 to 2001 Lynch served as a Senior Vice President for Safeguard Scientifics, where he was responsible for operations, mergers and acquisitions and oversight of emerging partnership companies including CompuCom Systems, where he became President and COO. Following that, from 2001 to 2008 Mr. Lynch served as a Senior Vice President for Staubach Company, now Jones Lang LaSalle (JLL), and later managing Director for the Musser Group. Currently, Admiral Lynch is Executive Chairman of NewDay USA, a mortgage lending company focused on providing VA loans for active duty and retired military personnel. He also serves as Chairman of the U.S. Naval Academy Athletic & Scholarship Foundation. As a result of these and other professional experiences, Mr. Lynch possesses particular knowledge and experience in management, board practices of other organizations, operations and the defense industry that strengthen the Board’s collective qualifications, skills, and experience.

David W. Jolly has been a director since January 2017 and brings over 20 years of Federal Government experience, most recently as a member of the United States Congress. Since July 2018, Mr. Jolly has served as Executive Vice President and Principal of Shumaker Advisors Florida, LLC, a Tampa, Florida based firm providing public affairs services to public and private sector clients. From February 2017 until July 2018, Mr. Jolly served as an independent consultant and advisor focusing on strategic planning and government relations. From March 2014 through January 2017, Mr. Jolly served as a member of the United States House of Representatives representing the 13^th District of Florida. During his tenure, he served on the House Committee on Appropriations where he was responsible for oversight and funding of all Federal Departments and Agencies, including the Department of Defense. From 2008 until being elected to the United States Congress, Mr. Jolly served as managing partner of Three Bridges Advisors, a government relations firm, and Three Bridges Law, while also serving as Vice President of Boston Finance Group. Prior to that, he was a lobbyist with Van Scoyoc Associates in Washington, DC. Mr. Jolly served as a senior staff member (1995-2001) and later general counsel (2002-2006) to United States Representative C. W. Bill Young, who served as the Chairman of the House Committee on Appropriations between 1999 and 2005. From 2001 until 2002, he was an associate at Fried Frank, an international law firm. Mr. Jolly earned a Bachelor of Arts in History from Emory University in Atlanta, Georgia. and a Juris Doctorate cum laude from the George Mason University School of Law in Arlington, Virginia. Mr. Jolly possesses particular knowledge and experience in Federal Government contracting, United States Department of Defense appropriations, and the defense industry that strengthen the Board’s collective qualifications, skills, and experience.

Tom L. Schaffnit has been a director since June 2000. Mr. Schaffnit has an engineering education and background, complemented by an MBA degree and senior management experience. Since March 1999, he has been President of Schaffnit Consulting, Inc., a technology-related management consulting company specializing in vehicle safety communications, automotive telematics, and wireless data communications. Since December 2009, he has also been President of A2 Technology Management LLC, a company focused on policy and security research related to connected and automated vehicles. Mr. Schaffnit is actively involved in the development and deployment of wireless technologies and standards. He is currently working with the U.S. Department of Transportation on wireless safety communications to facilitate the deployment of vehicle-to-vehicle and vehicle-to-infrastructure systems to prevent crashes and to support safe automated driving. Mr. Schaffnit possesses particular knowledge and experience in technology development and management that strengthen the Board’s collective qualifications, skills, and experience.

Thomas J. Meaney has been a director since July 1986. He has served as Chief Executive Officer of the Company since 1998. Mr. Meaney has over forty years of executive management experience, including holding senior positions at Robotic Vision Systems Incorporated, a manufacturer of robotic vision systems, and Norden Systems, a division of United Technologies Corporation. Mr. Meaney presently owns his own defense consulting company with offices in Arlington, Virginia and Chadds Ford, Pennsylvania. As a result of these and other professional experiences, Mr. Meaney possesses particular knowledge and experience in management, manufacturing, the defense industry, and board practices of other corporations that strengthen the Board’s collective qualifications, skills, and experience.

Mark J Malone has been a director since February 2019, has served as President of the Company since November 1, 2017 and served as Vice President, Commercial Markets of the Company from May 1, 2017 to November 1, 2017. Mr. Malone has more than 20 years of experience in investment banking and capital markets. Prior to joining the Company, he served as Managing Director in the Institutional Equity Capital Markets division of Guggenheim Partners from February 2015 through March 2017. He was Managing Director at Janney Capital Markets from December 2013 through February 2015, and Managing Director at Lazard Capital Markets from March 2008 until December 2013. In these senior positions, Mr. Malone performed a variety of executive management functions in equity sales, including revenue/profit responsibilities, and has extensive experience in new business development, capital raising, and relationship management. Mr. Malone earned a BS in Business Administration from the University of Richmond and is the son-in-law of Thomas J. Meaney, the Chief Executive Officer and a director of the Company. Mr. Malone possesses particular knowledge and experience in executive management, corporate finance, and capital markets that strengthen the Board’s collective qualifications, skills, and experience.

The principal occupation and business experience, for at least the past five years, of each current executive officer is as follows:

Walter T. (Chuck) Bristow has served as Chief Operating Officer of the Company since July 2017. Mr. Bristow was Vice President of Operations from February 2015 to July 2017, with responsibility for operations in the Fort Washington, Pennsylvania and Largo, Florida facilities. Mr. Bristow was Vice President of Engineering from August 2007 until February 2015 and served as our Director of Engineering from October 2003 to October 2007. Prior to Mikros, Mr. Bristow served as the Director of Network Engineering for Clariti Telecommunications International, and a hardware engineer with Magnavox/General Atronics Corporation, a manufacturer of military communications equipment.

David Henry Silcock has been Chief Technology Officer since February 2009, and was a Senior Staff Engineer from 2003 until 2009. Mr. Silcock was also appointed as Director of Special Projects in February 2015. Mr. Silcock has more than thirty years of experience and has been lead engineer on a number of successful R&D programs, including frequency-diversity modems for tactical radio networks, telemetry networks for ocean-going buoys, and digital voice pager design and development. He also has experience in network and system simulation, software and microprocessor architecture, custom VSLI development, DSP and real-time systems.

Patricia A. Kapp has been Corporate Secretary since April 1996. In September 1998, Ms. Kapp was also named Treasurer and in 2015, was named Vice President of Finance. Ms. Kapp has served in various capacities with the Company since 1987.

Section 16(a) of the Exchange Act requires our directors, officers and stockholders who beneficially own more than 10% of any class of our equity securities registered pursuant to Section 12 of the Exchange Act to file initial reports of ownership and reports of changes in ownership with respect to our equity securities with the SEC. All reporting persons are required by SEC regulation to furnish us with copies of all reports that such reporting persons file with the SEC pursuant to Section 16(a). Based solely on our review of the copies of such forms received by us and upon written representations of such reporting persons, we believe that all reporting persons timely filed all reports required by Section 16(a) under the Exchange Act.

In March 2004, our Board of Directors formed an Audit Committee. The members of the Audit Committee are Tom L. Schaffnit (Chair), Thomas C. Lynch, Paul G. Casner, Jr. and David W. Jolly. The Audit Committee oversees and monitors management’s and the independent outside auditor’s participation in the accounting and financial reporting processes and the audits of our financial statements. The Audit Committee has the responsibility to appoint, compensate, retain and oversee the work of the outside independent auditors and to consult with the independent auditors and the appropriate officers of the Company on matters relating to outside auditor independence, corporate financial reporting, accounting procedures and policies, adequacy of financial accounting and operating controls, and the scope of audits. The Audit Committee is governed by an Audit Committee Charter, which was adopted on March 10, 2004 and amended on March 17, 2008 and February 9, 2009.

Since our inception, we have had a limited number of employees and generated limited revenues, most of which have been from a single customer. In light of the foregoing, and the need to conserve our financial resources to execute our business plan, our Board of Directors concluded that the benefits of retaining an individual who qualifies as an “audit committee financial expert,” would be outweighed by the costs of retaining such a person. As a result, no member of our Board of Directors qualifies as an “audit committee financial expert.”

We have adopted a written code of ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our Code of Business Conduct and Ethics is available on our website, www.mikrossystems.com, or without charge upon written request directed to Patricia A. Kapp, Secretary, Mikros Systems Corporation, 707 Alexander Road, Building Two, Suite 208, Princeton, New Jersey 08540.

The following table provides certain summary information concerning compensation earned by the executive officers named below (“named executive officers”) during the years ended December 31, 2018 and 2017.

(1) On October 22, 2018, we granted Mr. Malone a restricted stock award consisting of 30,000 shares of common stock. The award vests in five equal annual installments beginning on October 22, 2019 and will be fully vested October 22, 2023. The grant date fair value computed in accordance with FASB ASC Topic 718 was based on closing market price of our common stock of $0.44 per share on the date of grant.

The following table sets forth information regarding unexercised stock options and restricted stock awards that have not vested for each named executive officer outstanding as of December 31, 2018:

Narrative Disclosure to Summary Compensation and Outstanding Equity Awards Tables

On July 25, 2016, we granted to Mr. Bristow a restricted stock award consisting of 25,000 shares of common stock. The award vests in five equal annual installments beginning on July 25, 2017 and will be fully vested July 25, 2021.

On May 1, 2017 and October 22, 2018, we issued to Mr. Malone under the 2017 Stock Incentive Plan restricted stock awards consisting of 30,000 shares of common stock. The awards vest in five equal annual installments beginning on the date of grant and will be fully vested on the fifth anniversary of such grant. For a more complete description of the terms and conditions of the foregoing awards, including a description of the change in control provisions, please see “2017 Stock Incentive Plan in Item 12 below.

We do not have any employment agreements with any of our named executive officers. Each year we consider payment of discretionary cash bonuses based primarily on Company and to a lesser extent, individual performance. Based on our financial performance in 2017 and 2018, we awarded discretionary bonuses to our named executive officers. We believe these bonuses were not only commensurate with our overall financial performance, but were also necessary to motivate and retain our key officers.

The following table sets forth the compensation for year ended December 31, 2018 for those persons who served as members of our Board of Directors during 2018:

We pay an annual fee of $20,000 to each of our non-employee directors. We also make periodic grants of equity awards to our non-employee directors. Each member of our Board of Directors receives reimbursement of expenses incurred in connection with his services as a member of our board or board committees.

For a more complete description of the terms and conditions of the award set forth in the table above, including a description of the change in control provisions, see “ 2007 Stock Incentive Plan ” in Item 12 below.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information, as of March 28, 2019 with respect to holdings of our common stock by (i) each person known by us to be the beneficial owner of more than 5% of the total number of shares of common stock outstanding as of such date, (ii) each of our directors and executive officers, and (iii) all directors and executive officers as a group. Except as otherwise indicated, the address of each person is 707 Alexander Road, Suite 208, Princeton, New Jersey 08540.

(1) The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and, in accordance therewith, includes all shares of our common stock that may be acquired by such beneficial owners within 60 days of March 28, 2019 upon the exercise or conversion of outstanding options or other convertible securities. This table has been prepared based on 35,561,775 shares of common stock outstanding on March 28, 2019. Except as otherwise indicated, all shares are beneficially owned and the sole investment and voting power is held by the persons named.

(2) Includes 25,000 shares of restricted common stock which vest in five equal annual installments commencing July 25, 2017.

(3) Includes 20,000 shares issuable upon exercise of options. Also includes 24,000 shares of restricted stock which vest in three equal annual installments commencing July 25, 2017.

(4) Consists of 30,000 shares of restricted stock which vest in three equal annual installments commencing January 31, 2018.

(6) Consists of 60,000 shares of restricted stock which vest in five equal annual installments commencing one year after the date of grant.

(7) Includes 40,000 shares issuable upon exercise of options. Also includes 25,000 shares of restricted common stock which vest in five equal annual installments commencing July 25, 2017.

The following is certain information about our equity compensation plans as of December 31, 2018:

On July 24, 2017, we adopted the Mikros Systems Corporation 2017 Omnibus Incentive Plan (the “2017 Plan”) under which we may grant cash and equity-based incentive awards to eligible service providers. The 2017 Plan is administered by the compensation committee of the Board of Directors, which may delegate its duties and responsibilities to one or more officers, agents or advisors (referred to collectively as the plan administrator below), subject to the limitations imposed under the 2017 Plan and applicable law. The aggregate number of shares of common stock available for issuance under the 2017 Plan is 3,000,000 shares.

The 2017 Plan provides for the grant of stock options, stock appreciation rights, or SARs, restricted stock, dividend equivalents, restricted stock units, performance awards, performance cash awards, and other stock or cash based awards. All awards under the 2017 Plan will be set forth in award agreements, which will detail the terms and conditions of awards, which may include any applicable vesting and payment terms and post-termination exercise limitations. Until such time, if any, that the 2017 Plan is approved by our stockholders, we may not issue incentive stock options, or ISOs.

The plan administrator may select performance measures for an award to establish performance goals for a performance period. When determining performance goals, the plan administrator may provide for the inclusion or exclusion of the impact of certain non-recurring events as well as certain legal, regulatory, tax or accounting changes.

In the event of a change in control in which outstanding awards under the 2017 Plan are not assumed or substituted, then prior to the change in control (i) all outstanding options and SARs will become immediately exercisable in full and will terminate upon consummation of the change in control; (ii) all restrictions and vesting requirements applicable to any award based solely on the continued service of the participant will terminate; and (iii) all awards, the vesting or payment of which are based on performance goals, will vest as though such performance goals were achieved at target. Notwithstanding the foregoing, in connection with a change in control, the plan administrator may determine that outstanding stock-based awards granted under the 2017 Plan, whether or not exercisable or vested, will be canceled and terminated in exchange for a cash payment (or the delivery of shares, other securities or a combination of cash, shares and securities) equal to the difference, if any, between the consideration to be received by Company stockholders in respect of a share of common stock in connection with such change in control and the purchase price per share, if any, under the award, multiplied by the number of shares of common stock subject to such award.

Our Board of Directors may terminate the 2017 Plan at any time and the plan administrator may amend the 2017 Plan at any time; however, no amendment, other than an amendment that increases the number of shares available under the 2017 Plan, may adversely affect an award outstanding under the 2017 Plan without the consent of the affected participant, and stockholder approval will be obtained for any amendment to the extent necessary to comply with applicable law or SAR to reduce its price per share. The 2017 Plan will remain in effect until the day before the tenth anniversary of the date it was initially approved by our Board of Directors, unless earlier terminated by our Board of Directors. No awards may be granted under the 2017 Plan after its termination. As of the date of this report, 30,000 shares of restricted stock have been issued under the 2017 Plan.

On August 6, 2007, we adopted the Mikros Systems Corporation 2007 Stock Incentive Plan (the "Plan"). The Plan provided for the issuance of up to 3,000,000 shares of our common stock in the form of stock options or restricted stock awards to our employees, officers or directors as well as our consultants or advisors. The Plan terminated on August 5, 2017. The Plan is administered by our Board of Directors which has full and final authority to interpret the Plan. To the extent permitted by applicable law, our Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board. The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and is not a "qualified plan" under Section 401(a) of the Internal Revenue Code of 1986, as amended.

All stock options granted under the Plan are exercisable for a period of up to ten years from the date of grant, are subject to vesting as determined by the Board of Directors upon grant, and have an exercise price equal to not less than the fair market value of our common stock on the date of grant. Unless otherwise determined by the Board of Directors, awards may not be transferred except by will or the laws of descent and distribution. The Board of Directors has discretion to determine the effect on any award granted under the Plan of the death, disability, retirement, resignation, termination or other change in employment or other status of any participant in the Plan.

Upon the occurrence of a "reorganization event", defined as the merger of the Company with or into another corporation as a result of which our common stock is converted into or exchanged for cash, securities or other property or is cancelled, the exchange of all shares of our common stock for cash, securities or other property pursuant to a share exchange, or the liquidation of the Company, the Board of Directors may take any number of actions. These actions include providing for all options outstanding under the Plan to be assumed by the acquiring corporation or to become immediately vested and exercisable in full, and in the case of a reorganization event in which holders of our common stock receive a cash payment, to provide for a cash payment to holders of options equal to the excess, if any, of the per share cash payment over the exercise price of such options. Except as may otherwise set forth in an award agreement, upon the occurrence of a reorganization event other than a liquidation or dissolution of the Company, the repurchase and other rights of the Company under each outstanding restricted stock award shall inure to the benefit of the Company’s successor. Upon the occurrence of a reorganization event involving the liquidation or dissolution of the Company, an outstanding restricted stock award may be subject to acceleration of vesting unless otherwise provided in the award agreement. As of the date of this report, we have issued options under the Plan to purchase 222,000 shares of common stock and issued 457,000 shares of restricted stock under the Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Our Board of Directors reviews and, if appropriate, approves in advance all related person transactions. At any time in which an executive officer, director or nominee for director becomes aware of any contemplated transaction that, in that person’s judgment may be a related person transaction, the executive officer, director or nominee for director is expected to notify the chairman of the Board of Directors, or in the event the Chairman of the Board of Directors has an interest, the Secretary of the Company, of the transaction. Generally, the directors having no interest in the proposed transaction review such transaction and may consult with outside legal counsel regarding whether the transaction is, in fact, a related person transaction requiring special approval by the Board of Directors. If the transaction is considered to be a related person transaction, then the directors having no interest in the proposed transaction will review the transaction at its next scheduled meeting or at a special meeting.

Consulting Arrangement. During the years ended December 31, 2018 and 2017, we paid $26,000 and $11,000 respectively, to Paul G. Casner, the Chairman of our Board of Directors, in consideration of management consulting services.

Upon consideration of the criteria and requirements regarding director independence set forth in Rules 5000(a)(19) and 5605(a)(2) of the rules of the Nasdaq Stock Market, we have determined that Thomas C. Lynch, Tom L. Schaffnit and David W. Jolly are independent.

With regard to our Audit Committee, the Board of Directors has determined that Messrs. Jolly, Lynch and Schaffnit (Chair), who constitute a majority of the members of the Audit Committee, are independent with respect to the independence criteria for Audit Committee members set forth in Rule 5605(c)(2) of the rules of the Nasdaq Stock Market and Rule 10A-3(b)(1) of the Exchange Act.

In June 2013, we engaged BDO USA, LLP for the audit of our financial statements and the review of the financial statements included in our quarterly reports on Form 10-Q. Aggregate fees and expenses billed for the foregoing professional services for the year ended December 31, 2017 were $77,642.

On April 6, 2018, the Audit Committee approved the engagement of Baker Tilly Virchow Krause, LLP (“Baker Tilly”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ending December 31, 2018. Aggregate fees and expenses billed by Baker Tilly for the foregoing professional services for the year ended December 31, 2018 were $65,325.

There were no fees billed by our independent accountants for audit-related services during the fiscal years ended December 31, 2018 and 2017.

There were no fees billed by our independent accountants for tax fees for the years ended December 31, 2018 and 2017.

There were no fees billed by our independent accountants for non-audit services during the years ended December 31, 2018 and 2017.

All auditing services and non-audit services (other than the de minimis exceptions provided by Exchange Act) provided to us by our independent accountants must be pre-approved by the Audit Committee. Any future Audit-Related Fees and Tax Fees were pre- approved by the Audit Committee.

The following exhibits are filed or incorporated by reference as part of this report:

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.

We have audited the accompanying balance sheet of Mikros Systems Corporation (the "Company") as of December 31, 2018, and the related statements of income, shareholders’ equity, and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the “financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

We have audited the accompanying balance sheet of Mikros Systems Corporation (the "Company") as of December 31, 2017, and the related statements of income, shareholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provide a reasonable basis for our opinion.

Note 3 – Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents

Cash balances consist of funds that are immediately available to the Company and are held by financial institutions. For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Concentrations of credit risk

Substantially all of the Company’s revenue is derived from Small Business Innovation Research (“SBIR”) and Indefinite-Delivery, Indefinite-Quantity (“IDIQ”) contracts for the federal government. Approximately 98% and 99% of revenues in 2018 and 2017, respectively, were realized in connection with task orders issued under the IDIQ contract with the Naval Surface Warfare Center to deliver ADEPT units and to provide research, development, and program management and implementation of improvements to these units. Although the Company’s operations are not subject to any particular government approval or regulations, the Company is dependent upon funding being made available to the DoD in amounts sufficient to cover the SBIR grants and other DoD contracts for which the Company competes.

Financial instruments that subject the Company to credit risk consist of cash and cash equivalents and accounts receivable.

The Company's policy is to limit the amount of credit exposure to any one financial institution, and place investments with financial institutions evaluated as being creditworthy, or in short-term money market funds which are exposed to minimal interest rate and credit risk. The Company maintains its cash primarily in investment accounts within large financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances up to $250,000 per bank. At times, the Company’s cash and cash equivalent balances may exceed the FDIC insured limits. The Company has not experienced any losses on its bank deposits and management believes these deposits do not expose the Company to any significant credit risk.

Receivables on government contracts are stated at outstanding balances, less an allowance for doubtful accounts, if necessary. The allowance for doubtful accounts is established through provisions charged against operations. Receivables deemed to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance.

The allowance for doubtful accounts is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on past experience, aging of the receivables, adverse situations that may affect a customers’ ability to pay, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires estimates that may be susceptible to significant change. Unpaid balances remaining after the stated payment terms are considered past due. Substantially all of our business is conducted with the federal government in which nonpayment for awarded contracts is unlikely. No allowance for doubtful accounts was deemed necessary by management at December 31, 2018 and 2017.

Equipment, Furniture and Fixtures

Equipment, furniture and fixtures are stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives of 3-7 years. Depreciation expense amounted to $61,252 and $23,991 for the years ended December 31, 2018 and 2017, respectively, and is included in engineering expense.

Impairment of long-lived assets

The Company assesses the potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An asset's value is impaired if management's estimate of the aggregate future cash flows, undiscounted and without interest charges, to be generated by the asset are less than the carrying value of the asset. Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the asset over the estimated fair value of the asset. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges. There were no impairments of long-lived assets in 2018 or 2017.

Revenue Recognition

We provide our products and services under fixed-price and cost-reimbursable contracts. Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract. We also enter into cost-plus-fixed-fee contracts. The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does not vary with actual costs. We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Warranty Expense

The Company provides a limited warranty, as defined by the related warranty agreements, for its production units. The Company’s warranties require the Company to repair or replace defective products during the 12 month period following delivery and acceptance of production units by the government. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. During the years ended December 31, 2018 and 2017, the Company recognized a warranty expense (benefit) of $142,000 and $(198,967), respectively. Since the inception of the ADEPT IDIQ contract in March 2010, the Company has delivered 226 ADEPT units. As of December 31, 2018, there were 37 ADEPT units remain under the limited warranty coverage.

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

The following table reflects the reserve for product warranty activity for:

	December 31,
	2018			2017
Balance, beginning of the period	$	40,000		$	240,980
Provision for product warranty		142,000			40,000
Product warranty expirations		-			(238,967	)
Product warranty costs paid		(28,277	)		(2,013	)
Balance, end of the period	$	153,723		$	40,000

Research and Development Costs

Research and Development expenditures for research and development of the Company's products are expensed when incurred and are included in general and administrative expenses. The Company recognized research and development costs as follows:

	Year ended December 31,
	2018		2017
Salaries	$	74,694	$	228,610
Other costs		69,528		64,117
	$	144,222	$	292,727

Intangible Assets

The Company’s intangible assets include a license acquired during 2015. In July 2015, the Company purchased certain software products, intellectual property and related assets from VSE Corporation. The primary software programs purchased were the Prognostics Framework (PF) and Diagnostic Profiler (DP) programs. The Diagnostic Profiler software is used worldwide by several multinational companies for optimized maintenance of diverse product lines. The Diagnostic Profiler is also used by the US Air Force for depot test programs, and Prognostics Framework is used by the US Army for several missile defense systems. In 2015, the Company recorded an estimated liability for the estimated purchase price of this license based on the estimated license sales and agreed upon payments due to VSE Corporation over the term of the agreement which is based on the number of sales of these licenses over a six year period. At December 31, 2018 and 2017, the Company had an accrued liability of $0 and $0, respectively, representing the Company's estimated obligation to VSE Corporation based on future projected license sales through the end of the agreement. A reduction in the contingent liability of $116,000 was recorded in general and administrative expenses for the year ended December 31, 2017.

Licenses are amortized using a straight-line method over their estimated life of six years. For the years ended December 31, 2018 and 2017, amortization expense amounted to $21,000 each year and is included in general and administrative expenses on the Statements of Operations. Amortization expense for 2019 through 2020 will be $21,000 and for 2021 will be $10,500.

The Company has developed and continues to develop intellectual property (technology and data) under SBIR and other contracts. The request for a trademark for the product name “ADEPT” has been approved by the U.S. Patent and Trademark Office, and ADEPT® is a registered trademark of the Company. Under SBIR data rights, the Company is protected from unauthorized use of SBIR-developed technology and data for a period of five years after acceptance of all items to be delivered under a particular SBIR contract or any follow-on contract. Trade names and trademarks with finite lives are amortized using the straight-line method over their estimated useful lives. For each of the years ended December 31, 2018 and 2017, amortization expense amounted to $141 and $153, respectively, which related to the cost of the patents and trademarks and is included in engineering expenses on the Statements of Income.

Share-based Compensation

The Company records compensation expense associated with stock options and other forms of equity compensation based on the estimated fair value at the grant-date. There were no stock options issued for the years ended December 31, 2018 and 2017. During 2017, the Company granted an aggregate of 70,000 shares pursuant to restricted stock awards. The fair value of the restricted stock awards which amounted to $32,400 was determined on the date of grant using the Company’s closing stock price. The fair value of the restricted stock awards is being amortized over the vesting period of three to five years utilizing the straight-line method.

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

Income Taxes

The Company accounts for income taxes under a liability method. Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The deferred tax assets will be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company adopted a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. No significant income tax uncertainties were identified. Therefore, as of December 31, 2018 and 2017, there were no tax contingencies or unrecognized tax positions recorded.

The Company has determined that any future interest accrued, related to unrecognized tax benefits, will be included in interest expense. In the event the Company must accrue for penalties, such penalties will be included as an operating expense.

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”), which enacted a broad range of changes to the Internal Revenue Code, was signed into law. The 2017 Tax Act, among other things, included changes to U.S. federal tax rates, imposed significant additional limitations on the deductibility of interest and net operating losses. The Company’s net deferred tax assets and liabilities have been revalued at the newly enacted U.S. corporate rate and the impact, which was not significant, was recognized in tax expense for the year ended December 31, 2017, the year of enactment.

Earnings (loss) per share

Basic earnings (loss) per share ("EPS") is calculated by dividing net earnings (loss) allocable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the assumed exercise or conversion of all dilutive securities, using the treasury stock method.

Note 4 – Income Taxes

The income tax provision is comprised of the following for the years ended December 31:

	Year ended December 31,
	2018			2017
Current
State	$	57,612		$	12,500
Federal		135,000			15,084
		192,612			27,584
Deferred
State		(6,211	)		31,368
Federal		(19,667	)		164,878
		(25,878	)		196,246

Income tax expense	$	166,734		$	223,830

MIKROS SYSTEMS CORPORATION

Notes to Financial Statements

The reconciliation between the statutory federal income tax rate and the Company’s effective tax rate is as follows:

	Year ended December 31,
	2018			2017
Federal statutory rate		21.0	%		34.0	%
State taxes		8.2			6.1
Stock compensation		(0.5	)		7.6
Nondeductible lobbying expenses		3.8			3.2
Other nondeductible/nontaxable items		1.2			2.2
Other, net		(0.2	)		(4.4	)
Effective tax rate		33.5	%		48.7	%

Deferred tax assets consist of the following as of December 31:

	December 31,
	2018			2017
Intangible assets	$	(9,497	)	$	(14,275	)
Accrued warranty expense	$	39,837		$	10,366
Accrued payroll		37,872			26,016
Share-based compensation		6,713			116
State net operating loss carryforward		8,909			8,918
Other, net		5,069			5,680
Property and equipment		(45,371	)		(19,158	)
Valuation allowance		(8,909	)		(8,918	)
	$	34,623		$	8,745

In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers both positive and negative evidence in making this assessment, including the future reversal of existing temporary taxable differences, projected future taxable income, any recent expiration of unused net operating losses and tax planning strategies.

The Company continues to analyze its income tax positions and no significant income tax uncertainties were identified in 2018 and 2017. Therefore, the Company recognized no tax contingencies or unrecognized tax positions for the years ended December 31, 2018 and 2017. The Company is not currently under examination by the Internal Revenue Service. The United States federal statute of limitations remains open for the years 2015 onward. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company is not currently under examination in any state jurisdictions. The Company is no longer subject to federal or state income tax assessments for years prior to 2015.

		Page
PART I


Item 1.	Business	1

Item 1A.	Risk Factors	5

Item 2.	Properties	9

Item 3.	Legal Proceedings	9

Item 4.	Mine Safety Disclosures	9

PART II


Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	10

Item 8.	Financial Statements and Supplementary Data	14

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosures	14

Item 9A.	Controls and Procedures	15

Item 9B.	Other Information	15

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	16

Item 11.	Executive Compensation	18

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	20

Item 13.	Certain Relationships and Related Transactions, and Director Independence	22

Item 14.	Principal Accountant Fees and Services	22

PART IV

Item 15.	Exhibits and Financial Statement Schedules	23

Item 16.	Form 10-K Summary	24

	●	ADEPT®, the Adaptive Diagnostic Electronic Portable Testset, is a PC-based maintenance automation workstation used to maintain the Navy’s premier AN/SPY-1 phased array radar on Cruisers (CG) and Destroyers (DDG).
	●	ADSSS®, the ADEPT Distance Support Sensor Suite, is a Condition-Based Maintenance (CBM) system used to monitor Combat System Elements (CSEs) onboard the Littoral Combat Ship (LCS).

	•	Distance support capability enabling remote (shore based) system support by subject matter experts and fleet-wide system analysis;
	•	Reduction in the amount of electronic test equipment required for organizational level support;
	•	Modularity and programmability to overcome obsolescence issues encountered with current test equipment and support capability enhancements in future systems; and
	•	Elimination of the need for traditional manuals, paper documentation and discreet test equipment thereby easing the maintenance burden by integrating the required test equipment functionality and automated testing process and storing all necessary documentation within the ADEPT system.

Name	Number of Shares or Units of Stock That Have Not Vested (#)			Market Value of Shares or Units of Stock That Have Not Vested ($)(1)

Mark J. Malone		54,000	(2)		21,060

Walter T. Bristow		15,000	(3)		5,850

Name of Beneficial Ownership	Amount and Nature of Beneficial Ownership(1)		Percent of Class
Walter T. Bristow	103,000	⁽²⁾	*
Paul G. Casner	451,000	⁽³⁾	1.3%
David W. Jolly	30,000	⁽⁴⁾	*
Patricia A. Kapp	253,000	⁽⁵⁾	*
Thomas C. Lynch	406,040	⁽³⁾	1.2%
Mark J. Malone	60,000	⁽⁶⁾	*
Thomas J. Meaney	6,024,235		17.0%
Tom L. Schaffnit	851,400	⁽³⁾	2.4%
David Henry Silcock	107,730	⁽⁷⁾	*
Zeff Capital LP, 885 Sixth Avenue, New York, NY 10001	1,824,351		5.1%
All Current Directors and Officers as a Group (nine persons)	8,286,405		23.5%
*Less than 1%

Name	Age	Positions with the Company
Paul G. Casner	81	Chairman of the Board of Directors
David W. Jolly	46	Director
Thomas C. Lynch	76	Director
Tom L. Schaffnit	72	Director
Thomas J. Meaney	84	Chief Executive Officer, Chief Financial Officer, and Director
Mark J. Malone	52	President and Director
Walter T. Bristow	61	Chief Operating Officer
David Henry Silcock	66	Chief Technology Officer, Director of Special Projects
Patricia A. Kapp	52	Vice President of Finance, Secretary and Treasurer

Name (1)	Fees earned or paid in cash ($)		All Other Compensation		Total ($)

Paul G Casner		20,000		26,000 (2)		46,000

Thomas C. Lynch		20,000		-		20,000

Tom L. Schaffnit		20,000		-		20,000

David W. Jolly		20,000		-		20,000

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted– average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)

Equity compensation plans not approved by security holders		222,000	$	0.20		2,970,000
Total		222,000	$	0.20		2,970,000

3.1	Restated Certificate of Incorporation of Mikros Systems Corporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2017).

3.2	By-laws (incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K filed with the Commission on April 2, 2018).

3.3	Amendment No. 1 to the By-laws of Mikros Systems Corporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2017).

10.1	Mikros Systems Corporation 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed with the Securities and Exchange Commission August 9, 2007).

10.2	Form of Exchange Agreement by and between Mikros Systems Corporation and certain holders of shares of preferred stock (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 15, 2016).

10.3	Exchange Agreement by and between Mikros Systems Corporation and the United States Small Business Administration dated May 3, 2016 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 15, 2016).

10.4	Mikros Systems Corporation 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2017).

10.5	Form of Restricted Stock Award Agreement under the Mikros Systems Corporation 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2017).

10.6	Form of Stock Option Agreement under the Mikros Systems Corporation 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2017).

10.7	Loan Agreement dated January 31, 2018 between Mikros Systems Corporation and PNC Bank, National Association (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 15,2018).

10.8	Committed Line of Credit Note payable to PNC Bank, National Association dated January 31, 2018 (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 15,2018).

10.9	Security Agreement dated January 31, 2018 between Mikros Systems Corporation and PNC Bank, National Association (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 15,2018).

14.1	Mikros Systems Corporation Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to the Company's Form 10- QSB filed August 11, 2006).

31.1	Certification of principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.

32.1	Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.

101.INS	XBRL Instance

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation

101.DEF	XBRL Taxonomy Extension Definition

101.LAB	XBRL Taxonomy Extension Labels

101.PRE	XBRL Taxonomy Extension Presentation

	MIKROS SYSTEMS CORPORATION


Dated: April 1, 2019	By:	/s/ Thomas J. Meaney


		Thomas J. Meaney Chief Executive Officer and Chief Financial Officer

SIGNATURES	DATE



/s/ Paul G. Casner	April 1, 2019
Paul G. Casner, Director




/s/ Thomas C. Lynch	April 1, 2019
Thomas C. Lynch, Director


/s/Mark J. Malone
Mark J. Malone, President and Director	April 1, 2019




/s/ Thomas J. Meaney	April 1, 2019
Thomas J. Meaney, Chief Executive Officer, Chief Financial Officer, and Director (Principal Executive Officer, Principal Financial and Accounting Officer)




/s/ Tom L. Schaffnit	April 1, 2019
Tom L. Schaffnit, Director




/s/ David W. Jolly	April 1, 2019
David W. Jolly, Director

	December 31,
	2018			2017

Assets
Current assets:
Cash and cash equivalents	$	2,206,749		$	1,173,177
Receivables on government contracts		1,043,738			1,697,997
Prepaid expenses and other current assets		94,717			72,542
Total current assets		3,345,204			2,943,716
Property and equipment
Equipment		357,796			171,018
Leasehold improvements		21,306			21,306
Furniture & fixtures		43,174			37,557
Less: accumulated depreciation		(109,484	)		(106,570	)
Property and equipment, net		312,792			123,311
Intangible assets		140,428			137,683
Less: accumulated amortization		(75,241	)		(54,101	)
Intangible assets, net		65,187			83,582
Deferred tax assets		34,623			8,745
Total assets	$	3,757,806		$	3,159,354
Liabilities and shareholders' equity
Current liabilities:
Accrued payroll and payroll taxes	$	868,618		$	575,926
Accounts payable and accrued expenses		308,415			482,873
Accrued warranty expense		153,723			40,000
Deferred revenue		39,824			18,750
Total current liabilities		1,370,580			1,117,549
Long-term liabilities		19,560			21,920
Total liabilities		1,390,140			1,139,469

Shareholders' equity:
Preferred stock, convertible, par value $.01 per share, authorized 5,000,000 shares, none issued and outstanding		-			-
Common stock, par value $.01 per share, authorized 60,000,000 shares, issued and outstanding 35,568,775 and 35,561,775 shares, respectively		355,689			355,619
Capital in excess of par value		10,106,344			10,087,843
Accumulated deficit		(8,094,367	)		(8,423,577	)
Total shareholders' equity		2,367,666			2,019,885
Total liabilities and shareholders' equity	$	3,757,806		$	3,159,354

	Year ended December 31,
	2018		2017

Contract revenues	$	8,561,346	$	7,196,131

Cost of sales		3,602,555		2,994,087

Gross margin		4,958,791		4,202,044

Expenses:
Engineering		2,712,810		2,180,003
General and administrative		1,752,768		1,565,240

Total expenses		4,465,578		3,745,243

Income from operations		493,213		456,801

Other income:
Interest		2,731		2,834

Net income before income taxes		495,944		459,635

Income tax expense		166,734		223,830

Net income		329,210		235,805

Net income available to common shareholders	$	329,210	$	235,805

Income per common share - basic	$	0.01	$	0.01

Basic weighted average number of shares outstanding		35,308,668		35,519,394

Income per common share - diluted	$	0.01	$	0.01

Diluted weighted average number of shares outstanding		35,589,877		35,879,261

Mikros Systems Corporation
Statements of Shareholders' Equity

	Preferred Stock				Common Stock
	$0.01 Par Value				$0.01 Par Value				Capital in Excess			Accumulated
	Number of shares		Par Value		Number of shares		Par Value		of Par Value			Deficit			Total
Balance at January 1, 2017		-	$	-		35,424,775	$	354,249	$	10,061,894		$	(8,659,382	)	$	1,756,761
Stock compensation		-		-		-		-		14,969			-			14,969
Exercise of non-restricted stock awards		-		-		67,000		670		11,680			-			12,350
Restricted common shares issued		-		-		70,000		700		(700	)		-			-
Net income		-		-		-		-		-			235,805			235,805
Balance at December 31, 2017		-		-		35,561,775		355,619		10,087,843			(8,423,577	)		2,019,885
Stock compensation		-		-		-		-		18,221			-			18,221
Exercise of non-restricted stock awards		-		-		7,000		70		280			-			350
Net income		-		-		-		-		-			329,210			329,210

Balance at December 31, 2018		-	$	-		35,568,775	$	355,689	$	10,106,344		$	(8,094,367	)	$	2,367,666

	December 31, 2018
				Weighted		Weighted
	Options			Exercise Price		Life (in years)
Options outstanding - January 1, 2018		222,000		$	0.19		1.63
Granted		-			-
Exercised		(7,000	)		0.05
Forfeited/Cancelled		-			-
Options outstanding - December 31, 2018		215,000		$	0.20		0.53
Options exercisable - December 31, 2018		215,000		$	0.20		0.53

	December 31, 2017
				Weighted		Weighted
	Options			Exercise Price		Life (in years)
Options outstanding - January 1, 2017		624,000		$	0.39		1.64
Granted		-			-
Exercised		(67,000	)		0.05
Forfeited/Cancelled		(335,000	)		0.55
Options outstanding - December 31, 2017		222,000		$	0.19		1.63
Options exercisable - December 31, 2017		215,000		$	0.20		1.63